The price of Brent crude, the benchmark of Nigeria’s major export grade, dropped below its cost of production, settling at $30 on Monday, bringing ugly resonances of the economic downturn of 2016.
Nigeria has one of the highest crude production costs among Organisation of Petroleum Exporting Countries (OPEC), which falls within the range of $27 to $30, depending on whether the field is offshore on onshore. International Brent crude fell 10.9 percent, or $3.71, to trade at $29.13 per barrel, its lowest level since at least February 2016.
“Unlike 2016, there is no alliance anywhere. Nigeria is currently producing oil at a loss due to its relative higher production cost,” Daniel Akinboye, an oil trader reacting to the outcome of the oil price said.
“The refineries are docile; the country is so reliant on oil precisely because its leaders have paid lip service towards diversification,” Akinboye said.
Mele Kyari, group managing director, Nigerian National Petroleum Corporation (NNPC), said last week that the average cost of production for a barrel of crude for Nigeria was $30, saying, “If crude oil goes to $30-$32, you are already out of business.
“That therefore depresses the possibility of coming out of the impact of the coronavirus for a long time to come, at least 3 months.”
Nigeria also has about 35 unsold April-loading cargoes due to a drop in demand, according to traders with NNPC putting the total number at around 50. “There is a strong supply of competing crude, plus dwindling storage options,” a trader said.
The oil price war is expected to intensify in coming weeks as Saudi Arabia prepares to unleash as much as an extra 2.6 million bpd on the market in April, the United Arab Emirates (UAE) is ready to add another 1 million bpd, and Russia promises to boost production.
London-based global information provider, IHS Markit said the oil market is heading for the largest-ever crude glut in the first half of 2020, which could be two to nearly four times bigger than the biggest surplus recorded so far.
According to an IHS Markit note released on Monday, the glut in H1 2020 could reach between 800 million barrels and a staggering 1.3 billion barrels, more than two and up to nearly four times larger than the previous biggest glut of 360 million barrels in late 2015-early 2016.
“The last time that there was a global surplus of this magnitude was never,” Jim Burkhard, vice president and head of oil markets at IHS Markit said. “Prior to this the largest six-month global surplus this century was 360 million barrels. This will be twice that or more.”
IHS Markit noted that “what is coming could be a glut on a monthly basis of between 4 million bpd and 10 million bpd between February and May.”
“Oil demand in the next two months could be down by as much as 10 million bpd,” the analytics and consultancy firm said.
Jeremy Batstone-Carr, chief economist at Charles Stanley, warns that further price falls could really start hurting the big firms while Alan Gelder, of oil analysts Wood Mackenzie, says many North Sea oil operators are “beginning to really feel the pain” at current prices.
Already, many analysts have slashed their 2016 oil price forecasts, with Morgan Stanley analysts saying that “oil in the $20s is possible”, if China devalues its currency further.
Economists at the Royal Bank of Scotland say that oil could fall to $16, while Standard Chartered predicts that prices could hit $10 a barrel.
Big oil companies such as British Petroleum, Shell, Total and Exxon Mobil have weathered the storm by cutting back on billions of pounds of investment, and thousands of jobs have been cut.
For instance, Chevron is aggressively offering its 40 percent stake in the shallow-water Oil Mining Lease (OML) 86 and OML 88, which produce approximately 6,200 barrels of oil equivalent per day.
OML 86 and 88 contain 55 million barrels of yet-to-be exploited oil barrels and 79.3 billion cubic metres (2.8 trillion cubic feet) of undeveloped gas reserves, the document said.
Current oil price is a disastrous level for Nigeria’s economy, heightening fears of a second naira devaluation in four years since the plunge in oil prices which has led to dwindling export revenue and fast depleting foreign-exchange reserves.
Nigeria’s stock trading session on Monday, March 16 closed in the red zone with about N14billion lost at the close of trading as at 2:30pm.
“However, negative developments in the oil price war or coronavirus could spark further selloffs in local equities”, said market analysts at Lagos-based Vetiva.
DIPO OLADEHINDE
